243 U.S.

490
37 S.Ct. 412
61 L.Ed. 866

JESSE ISIDOR STRAUS et al., Petitioners,

v.
VICTOR TALKING MACHINE COMPANY.
No. 374.
Argued January 12, 1917.
Decided April 9, 1917.

Messrs. Edmond E. Wise and Walter C. Noyes for petitioners.

Messrs. Hector T. Fenton and Frederick A. Blount for respondent.
[Argument of Counsel from pages 491-493 intentionally omitted]
Messrs. Elisha K. Camp, Daniel N. Kirby, and Taylor E. Brown as amici
curiae.
Mr. Justice Clarke delivered the opinion of the court:

It will contribute to brevity to designate the parties to this proceeding as they

were in the trial court,the respondent as plaintiff and the petitioners as
defendants.

The plaintiff in its bill alleges: that it is a corporation of New Jersey; that for
many years it has been manufacturing sound-reproducing machines embodying
various features covered by patents of which it is the owner, and that, for the
purpose of marketing these machines to the best advantage, about August 1st,
1913, it adopted a form of contract which it calls a 'License Contract' and a
form of notice called a 'License Notice,' under which it alleges all of its
machines have, since that date, been furnished to dealers and to the public.

This 'License Notice,' which is attached to each machine and is set out in full in
the bill, declares that the machine to which it is attached is manufactured under
patents, is licensed for the term of the patent under which it is licensed having

the longest time to run, and may be used only with sound records, sound boxes,
and needles manufactured by the plaintiff; that only the right to use the machine
'for demonstrating purposes' is granted to 'distributors' (wholesale dealers), but
that these 'distributors' may assign a like right 'to the public' or to 'regularly
licensed Victor dealers' (retailers) 'at the dealer's regular discount royalty;' that
the 'dealers' may convey the 'license to use the machine' only when a 'royalty' of
not less than $200 shall have been paid, and upon the 'consideration' that all of
the conditions of the 'licanse' shall have been observed; that the title to the
machine shall remain in the plaintiff, which shall have the right to repossess it
upon breach of any of the conditions of the notice, by paying to the user the
amount paid by him, less 5 per cent for each year that the machine has been
used. The notice in terms reserves the right to the plaintiff to inspect, test, and
repair the machine at all times and to instruct the user in its use, 'but it assumes
no obligation to do so;' it provides that 'any excessive use or violation of the
conditions shall be an infringement of plaintiff's patent,' and that any erasure or
removal of the notice will be considered as a violation of the license. Finally, it
provides that at the expiration of the patent 'under which it is licensed' having
the longest time to run the machine shall become the property of the licensee
provided all the conditions recited in the notice shall have been complied with,
and the acceptance of the machine is declared to be 'an acceptance of these
conditions.'
4

The contract between the plaintiff and its dealers is not set out in full in the bill,
but it is alleged that since August 1st, 1913, the plaintiff has had with each of
its 7,000 licensed dealers a written contract in which all the terms of the
'License Notice' are in substance repeated, and in addition it is alleged that each
dealer, 'if he has signed the assent thereto,' is authorized to dispose of any
machines received from 'the plaintiff directly or through a paramount
distributing dealer,' but subject to all of the conditions expressed in the 'License
Notice.' It is alleged that this contract contains the provision that 'a breach of
any of the conditions on the part of a distributor will render him liable, not only
for an infringement of the patent, but to an action on the contract or other
proper remedy.'

As to the defendants, the bill alleges that they conduct a large mercantile
business in New York city; that with full knowledge of the terms of the
contract, as described, between the plaintiff and its distributors, and of the
'License Notice' attached to each machine, the defendants, 'being members of
the general unlicensed public,' and having no contract relation with the plaintiff
or with any of its licensed distributors or licensed dealers, induced 'covertly and
on various pretenses,' one or more of plaintiff's licensed distributors or dealers
to violate his or their contracts with the plaintiff, providing that no machines

should be delivered to any unlicensed member of the general public until 'the
full license price' stated in the 'License Notice' affixed to each machine was
paid, and thereby obtained possession of a large number of such machines at
much less than the prices stated in the 'License Notice;' that under the terms of
the said license agreement and notice, they have no title to the same, and that
they have sold large numbers thereof to the public, and are proposing and
threatening to dispose of the remainder of those which they have acquired to
'the unlicensed general public,' at much less than the price stated in the notice
affixed to each machine.
6

The prayer is for an injunction restraining the defendants from selling any of
the machines, possession of which they have acquired, from other and further
violation of plaintiff's rights under its letters patent, and for the usual
accounting and for damages.

The district court regarded the transaction described in the 'License Notice' as in
substance a sale which exhausted the interest of the plaintiff in the machine,
except as to the right to have it used with records and needles as provided for
therein, and this right not being involved in this case, it dismissed the bill. 222
Fed. 524.

On appeal, the circuit court of appeals affirmed this judgment and remanded
the case, but with instructions to allow the plaintiff to amend its bill 'if it be so
advised.' 140 C. C. A. 519, 225 Fed. 535.

The bill was thereafter so amended as to allege that the defendants had in their
possession a large number of machines which they had obtained from plaintiff's
distributors and dealers at much less in each case than the price stated in the
'License Notice,' and that they were proposing to dispose of these machines to
the 'unlicensed general public' at less than the prices stated in the 'License
Notice,' in disregard of plaintiff's rights.

10

Again, the district court, on the same ground as before, sustained a motion to
dismiss the bill, but the circuit court of appeals reversed this holding (144 C. C.
A. 591, 230 Fed. 449) and the case is here for review on certiorari.

11

The abstract of the bill which we have given makes it plain: That whatever
rights the plaintiff has against the defendants must be derived from the 'License
Notice' attached to each machine, for no contract rights existed between them,
the defendants being only 'members of the unlicensed general public;' and that
the sole act of infringement charged against the defendants is that they

exceeded the terms of the license notice by obtaining machines from the
plaintiff's wholesale or retail agents, and by selling them at less than the price
fixed by the plaintiff.
12

It is apparent from the foregoing statement that we are called upon to determine
whether the system adopted by the plaintiff was selected as a means of securing
to the owner of the patent that exclusive right to use its invention which is
granted through the patent law, or whether, under color of such a purpose, it is
a device unlawfully resorted to in an effort to profitably extend the scope of its
patent at the expense of the general public. Is it the fact, as is claimed, that this
'License Notice' of the plaintiff is a means or agency designed in candor and
good faith to enable the plaintiff to make only that full, reasonable, and
exclusive use of its invention which is contemplated by the patent law, or is it a
disguised attempt to control the prices of its machines after they have been sold
and paid for?

13

First of all, it is plainly apparent that this plan of marketing, adopted by the
plaintiff, is, in substance, the one dealt with by this court in Dr. Miles Medical
Co. v. John D. Park & Sons Co. 220 U. S. 373, 55 L. ed. 502, 31 Sup. Ct. Rep.
376, and in Bauer v. O'Donnell, 229 U. S. 1, 57 L. ed. 1041, 50 L.R.A.(N.S.)
1185, 33 Sup. Ct. Rep. 616, Ann. Cas. 1915A, 150, adroitly modified on the
one hand to take advantage, if possible, of distinctions suggested by these
decisions, and, on the other hand, to evade certain supposed effects of them.

14

If we look through the words and forms with which the plaintiff has most
elaborately enveloped its purpose, to the substance and realities of the
transaction contemplated, we shall discover several notable and significant
features. First, while, as if looking to the future, the notice, in terms, imposes
various restrictions as to title and as to the 'use' of the machines by plaintiff's
agents, wholesale and retail, and by the 'unlicensed members of the public,' for
itself, the plaintiff makes sure that the future shall have no risks, for it requires
that all that it asks or expects at any time to receive for each machine must be
paid in full before it parts with the possession of it.

15

Second, while in terms the 'use' of each machine is restricted, and forfeiture for
failure to strictly comply with the many conditions and requirements of the
notice is provided for, this system, elaborate to the extent of confusion, fails
utterly to provide for entering any evidence of a qualified title in any public
office or in any public record, and no requirement is found in it for reporting by
users or licensees, who may remove from one place to another, taking the
machine with them, as would very certainly be required if the plaintiff intended
to enforce the rights so elaborately asserted in this notice,if the system were

really a genuine provision designed to protect through many years to come the
restricted right to 'use' and the seemingly qualified title which it purports to
grant to dealers and to the public, from being exceeded or departed from.
16

Third. The fact that under this system 'at different times' 'large numbers' of
machines, as is alleged in the plaintiff's bill, have been 'covertly' sold to the
defendants by the plaintiff's wholesale and retail agents at less than the price
fixed for them, is persuasive evidence that the transaction is not what it
purports on its face to be. If it were a reasonably guarded plan, really intended
to keep the plaintiff in touch with each of its machines until the expiration of
the patent of latest date, for the purpose of insisting upon its being used in the
manner provided for in the 'License Notice,' the plaintiff's prompt and sufficient
remedy for such an invasion of its right as is claimed in this case would be
found in its sales department, or rather in its 'license' department, and not in the
courts. That the plaintiff comes into court with a bill to enjoin the defendants
from reselling machines secretly sold to them in large numbers by the plaintiff's
agents indicates very clearly that at least until the exigency out of which this
case grew arose, the scheme was ragarded by the plaintiff itself and by its
agents simply as one for maintaining prices by holding a patent infringement
suit in terrorem over the ignorant and the timid.

17

And finally, while the notice permits the use of the machines, which have been
fully paid for, by the 'unlicensed members of the general public,' significantly
called in the bill 'the ultimate users,' until 'the expiration of the patent having
the longest term to run' (which, under the copy of the notice set out in the bill,
would be July 22d, 1930), it provides that if the licensee shall not have failed to
observe the conditions of the license, and the Victor Company shall not have
previously taken possession of the machine, as in the notice provided, then,
perhaps sixteen years or more after he has paid for it, and in all probability long
after it has been worn out or become obsolete and worthless, 'it shall become
the property of the licensee.'

18

It thus becomes clear that this 'License Notice' is not intended as a security for
any further payment upon the machine, for the full price, called a 'royalty,' was
paid before the plaintiff parted with the possession of it; that it is not to be used
as a basis for tracing and keeping the plaintiff informed as to the condition or
use of the machine, for no report of any character is required from the 'ultimate
user' after he has paid the stipulated price; that, notwithstanding its apparently
studied avoidance of the use of the word 'sale,' and its frequent reference to the
word 'use,' the most obvious requirements for securing a bona fide enforcement
of the restrictions of the notice as to 'use' are omitted; and that, even by its own
terms, the title to the machines ultimately vests in the 'ultimate users,' without

further payment or action on their part, except patiently waiting for patents to
expire on inventions which, so far as this notice shows, may or may not be
incorporated in the machine. There remains for this 'License Notice,' so far as
we can discover, the function only of fixing and maintaining the price of
plaintiff's machines to its agents and to the public, and this, we cannot doubt, is
the purpose for which it really was designed.
19

Courts would be perversely blind if they failed to look through such an attempt
as this 'License Notice' thus plainly is to sell property for a full price, and yet to
place restraints upon its further alienation, such as have been hateful to the law
from Lord Coke's day to ours, because obnoxious to the public interest. The
scheme of distribution is not a system designed to secure to the plaintiff and to
the public a reasonable use of its machines, within the grant of the patent laws,
but is in substance and in fact a mere price-fixing enterprise, which, if given
effect, would work great and widespread injustice to innocent purchasers, for it
must be recognized that not one purchaser in many would read such a notice,
and that not one in a much greater number, if he did read it, could understand
its involved and intricate phraseology, which bears many evidences of being
framed to conceal rather than to make clear its real meaning and purpose. It
would be a perversion of terms to call the transaction intended to be embodied
in this system of marketing plaintiff's machines a 'license to use the invention.'
Bauer v. O'Donnell, 229 U. S. 1, 16, 57 L. ed. 1041, 1046, 50 L.R.A.(N.S.)
1185, 33 Sup. Ct. Rep. 616, Ann. Cas. 1915A, 150.

20

Convinced, as we are, that the purpose and effect of this 'License Notice' of
plaintiff, considered as a part of its scheme for marketing its product, is not to
secure to the plaintiff any use of its machines, and as is conemplated by the
patent statutes, but that its real and poorly-concealed purpose is to restrict the
price of them, after the plaintiff had been paid for them and after they have
passed into the possession of dealers and of the public, we conclude that it falls
within the principles of Adams v. Burke, 17 Wall. 453, 456, 21 L. ed. 700, 703;
and of Bauer v. O'Donnell, 229 U. S. 1, 57 L. ed. 1041, 50 L.R.A.(N.S.) 1185,
33 Sup. Ct. Rep. 616, Ann. Cas. 1915A, 150; that it is, therefore, invalid, and
that the district court properly held that the bill must fail for want of equity.

21

It results that the decree of the Circuit Court of Appeals will be reversed and
that of the District Court affirmed.

22

Reversed.

23

Dissenting: Mr. Justice McKenna, Mr. Justice Holmes, Mr. Justice Van

Devanter.